I have a balanced diversified portfolio. However, my Stocks and Shares ISA portfolio is admittedly skewed toward UK stocks. Fortunately, I view the leading UK index (FTSE 100) as a global equity stock market. Its constituents have internationally diversified sources of earnings. Nevertheless, more global stock diversification wouldn’t go amiss for me right now.
My urgency has been ramped up after coming across some compelling data. The data showed the performance of S&P 500 has comfortably trounced the FTSE 100 and most other major world markets since the dawn of this century.
Is there a US market premium?
I am in no doubt that backing the US market since the millennium would have been a smart investment decision for me.
The index is a fundamentally better option for me than the FTSE 100. Firstly, the S&P 500 is significantly less concentrated than the FTSE 100. As the name implies, the S&P 500 tracks a great deal more companies than the FTSE 100. Thus it is a more diversified stock universe. Additionally, the largest market cap companies have a greater impact on the FTSE 100, than the former. For example, the top 10 stocks in the S&P 500 make up around 30% of the index. Meanwhile, this number rises to 40% when you look at the FTSE 100.
The outperformer of the century
Out of the leading blue-chip indices, the S&P 500 has certainly outperformed. However, I note that even better returns have been available much closer to home. It surprised me to discover the more junior FTSE 250 index – which tracks medium sized companies in the UK – has performed even more strongly than the S&P 500 since the turn of this century. The S&P 500 has an annualised return of around 6% since 2000. But the FTSE 250 has returned 7%!
The risk for me when investing in mid-cap UK companies is that they tend to be more wedded to the UK economy than blue-chips stocks.
However, I believe this trend has been changing. According to FTSE Russell, just over half of the earnings from FTSE 250 companies come from overseas these days, compared to more than three quarters for the FTSE 100. Certainly, I believe the FTSE 250 is becoming more diverse with time.
Consider a range of stock markets
Clearly, medium-sized companies offer me greater growth potential than the blue-chip stocks on the leading indexes like the FTSE 100 and S&P 500. I think it is the reason it has outperformed all other stock markets over the last two-and a-bit decades. Granted, this outperformance has come with a much rockier and volatile journey versus the blue-chip indexes. But there is no reward without risk.
Past performance, of course, is no indicator of future performance. But the key takeaway for me here is that all the leading stock markets I’ve mentioned, whether in the US or UK, have all grown since the turn of the century.
Global diversification is a crucial element of my investment approach. I can reap serious rewards if I pick the best companies from each of these stock markets.